DeFi Research News February 2024

Stablecoins Update

This is a new section in our monthly DeFi research report. Moving forwards we want to highlight the most important events in the stablecoin space. We hope you enjoy reading it. 

Stablecoin market cap continued to trail up slightly from ~$135B to ~$145B ending on a positive note. The top two, USDT ($101B) and USDC ($28B) accounting for over 90% of the total market cap.

Circle Phases Out USDC Support on TRON

Circle is discontinuing support for its USDC stablecoin on the TRON blockchain as part of a phased transition. They have immediately stopped minting USDC on TRON and will facilitate the transfer of USDC to other blockchains for their Circle Mint customers through February 2025. This decision affects business and institutional customers directly associated with Circle, while retail users and other non-Circle customers are advised to move their USDC on TRON to exchanges or distributors where it can be transferred to other supported blockchains or redeemed for fiat currency.

The reason behind this move is rooted in Circle's risk management framework, where they continually assess the suitability of all blockchains that support USDC. The decision to end support for USDC on TRON comes from a comprehensive evaluation involving various aspects of Circle's operations, including business, compliance, and other functions. This step is taken to ensure that USDC remains a trusted, transparent, and safe digital dollar

Ethena Labs USDe is not being marketed as a stablecoin anymore

USDe which started as a stablecoin works on the priciple that you have yield on staked ETH and you have yield on hedging your long position. Combined together it becomes a deltaneutral strategy. Resulting in “stablecoin”. However Ethena Labs do not label it as stableoin anymore as there was backlash from the community. If it is not backed by fiat, we shouldn’t call it stablecoin. Their compliance department probably warned them against advertising themselves as a stablecoin (following Terra’s UST collapse). So the call themselves the Internet Bond. Essentially USDe is a tokenized access to Ethena’s hedge-fund strategy that tries to maintain the stable value while also accruing yield using ETH as the asset.  

Why Stablecoins is the Killer App of Crypto

Egypt is currently experiencing a currency crisis, and is likely to perform another official devaluation soon. The black market exchange rate for people in Egypt that actually want to get their hands on dollars is currently around twice what the official/artificial rate is, since the official rate is unsustainably pegged. Bloomberg’s chief emerging markets economist Ziad Daoud reports:

Nigeria, which unlike Egypt has one of the highest bitcoin and stablecoin adoption rates in the world (and the highest peer-to-peer trading volumes in the world according to Chainalysis), has also been undergoing a currency crisis. They previously had a big gap between the black market rate and the official rate like Egypt currently has, and they’ve now let that official rate blow-out. This chart shows the dollar to Naira exchange rate, via Bloomberg:

These are the two largest economies in Africa, with a combined population of over 300 million people.

This type of thing happens regularly around the world, affecting billions of people. From Latin America to Africa to southeast Asia, it’s the same story over and over.

A key thing that stablecoins do is that they give people around the world more of a choice for their money. The world consists of 160+ different currency monopolies that control their financial borders rather tightly, and for decades it has been the case that if people are born in a badly performing one, then they don’t have much recourse for that unless they are wealthy enough to get access to foreign bank/brokerage accounts.

Stablecoins give people more access to saving technologies and cross-border payment technologies regardless of how bad their local currency and banking system is, as long as they come to know how they work and have some internet access, which is indeed the case for many people in these countries.

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Bitcoin Update

Recently our CEO Maxim Galash wrote a bullish article on his current thoughts about the recent price action of Bitcoin: 

Bitcoin and market update

Last year in March BTC was ~$20,000. It rallied up to $45,000 just before the ETF was approved. Bitcoin hit all-time highs in nearly every currency that’s not the US$ this month. Which means the currencies in those countries are devaluing faster against the US dollar. Click the image below to see even more countries.

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All Bitcoin ETFs are now profitable

The newly approved Bitcoin spot ETFs are barely 2 month old babies and they have gathered AUM that took gold ETFs almost 3 years! The smallest ETF, WisdomTree Bitcoin Fund has around $60M AUM and even they are profitable. So there is no sign of any of the nine ETFs closing their shop as was speculated earlier by some who didn’t see the need for 9 of them offering the same thing. 

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And it is just getting started. Down the road more financial advisors will introduce the asset to their client. Many advisors still haven’t advertised it to their clients. There is a multi-month process for most advisors in order to let their clients add BTC ETFs to their portfolio. These are pools of capital that couldn't buy BTC before, but can now do so through ETFs. 

Big players entering the space

The Arizona State Senate is considering a proposal to encourage the Arizona State Retirement System (ASRS) and the Public Safety Personnel Retirement System (PSPRS) to explore the inclusion of Bitcoin ETFs in their investment portfolios. 

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Source: https://legiscan.com/AZ/supplement/SCR1016/id/426920

While Fidelity Allocates BTC to their “conservative all in one” portfolio

Fidelity Canada is now allocating 1-3% spot Bitcoin ETFs allocation into its “All-in-One” asset allocation funds, These are their “conservative all in one” portfolio. Fidelity has a 23 page research report on The case for bitcoin if you want to understand why they are betting on this technology. 

And Stanford’s Blyth Fund allocates 7% to BTC

On March 5, computer science major and leader at the Stanford Blockchain Club Kole Lee announced that the university’s student-run Blyth Fund allocated around 7% of the portfolio to BTC (at around $45,000/BTC) through BlackRocks IBIT ETF.

Meanwhile, BlackRock filed an amendment with the SEC on March 4 to incorporate Bitcoin exposure in its Strategic Income Opportunities Fund (BSIIX) which manages close to $36.5B AUM. 

All these factors and a lot more that we cannot cover in this short article have led to the rise in the price recently. 

Lyn Alden has the best explanation of what these ETFs are: "in developer terms, it is the API for the fiat system to plug into the Bitcoin network a little better than it used to. It is an upgrade to the TradFi system not the Bitcoin system"

Spot BTC ETF options trading

Spot BTC ETF options trading is next in line for approval. Many exchanges have filed to offer derivatives products related to the newly approved spot ETFs. Nasdaq for example is seeking to list and trade options specifically on BlackRock's iShares Bitcoin Trust ETF. However, the SEC pushed back the decision to open up options trading on spot Bitcoin ETFs as of March 6th citing they need “sufficient time to consider”. Apr 24, 2024 is the next deadline for this, which almost coincides with the halving of BTC. So that should be a very interesting time to watch. 

Layer-2 Bitcoin Developer Activity is on a tear

The future of Bitcoin is the most exciting it has ever been. There is a lot more activity on Layer 1 Bitcoin blockchain through the use of Ordinals (on-chain NFTs on Bitcoin chain). However, if BTC wants to truly evolve into something more than just a store of value, it has to move to Layer-2, where the transaction speed is high and fees are cheaper. There are several projects worth watching in the Bitcoin Layer 2 ecosystem. 

I’ll mention a few that I am personally watching: 

Stacks is a Layer-2 on bitcoin blockchain working on bringing smart contract functionalities to the network treating BTC as the TCP-IP protocol of the internet applications. It is the leading Bitcoin L2, bringing smart contract functionality to Bitcoin, without modifying Bitcoin itself. Stacks has a token sBTC which is a 1:1 Bitcoin-backed asset on the Stacks Bitcoin L2 that will allow developers to leverage the security, network effects, and .5T in latent capital of the Bitcoin network. There is a proposal to bridge Stacks and BitVM. Future updates on Stacks will enable sub-5 second finality (currently around 10 minute on the L1 Bitcoin network). This will also enable DeFi on Bitcoin which as you know is my core focus at Coinchage. It already has around $150M TVL. 

David Marcus (ex-facebook lead of Diem, ex-PayPal responsible for PYUSD stablecoin) is now building stablecoins on the Bitcoin network through his startup Lightspark.  

Liquid is a sidechain-based, Bitcoin layer-2 settlement network linking together cryptocurrency exchanges and institutions around the world, enabling faster, more confidential Bitcoin transactions and the issuance of digital assets.

Lightning network is a state-channel (a concept drawn from Ethereum state channels) and is a completely trustless/ non-custodial way for ultra cheap and ultra fast (lightning fast) bitcoin transactions. 

BitVM (a Bitcoin Virtual Machine, very close to being fully trustless where the trust is based on 1-of N signers) requires no change to the L1 Bitcoin chain. It is like an optimistic rollup on bitcoin. Most of the logic is off-chain and there are "fraud-proofs" settled on the Layer 1 Bitcoin blockchain. 

There are other initiatives such as zk-rollups, Polkadot compatible chains, Cosmos compatible chains. Bottom-line, there is tons of experimentation on building applications on the Bitcoin Network, now that the asset has received blessings from the TradFi in the form of ETFs. I think Bitcoin L2s have the potential to overtake Ethereum L2s if it really catches on. 

Halving

Halving is a yet another beast of an event that is coming up at the end of April. Every four years, the number of new bitcoins that are released into the market by the network (aka can be mined by the miners), reduces in half. Around 900 new Bitcoins are mined per day currently, and after the halving it will go down to 450. While Halving does have an impact in terms of reminding users of the scarcity of BTC which is a key factor for price to go up (assuming demand goes up over time), the global M2 growth (liquidity) is a much better metric to follow in terms of predicting tops and bottoms of the cycle. Previously the highs and the lows have correlated with the liquidity highs and lows. Will liquidity go up over the next couple of years? Probably yes. So is there room for BTC Price to go up from here? You guessed it! 

The highest monthly candle ever in the history of BTC. 

Source: Checkmate/X

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Feb 2024 printed a $19.84k Bitcoin candle, the largest monthly USD increase in history, which added a whopping $390B (47% increase) to its market cap. 

Bicoin is entering Academia. 

Three philosophy professors wrote a book called Resistance Money: A Philosophical Case for Bitcoin. These are Associate Professors at Yale-NUS College and the University of Wyoming. This is going to be an academic textbook exploring bitcoin, not a regular retail book. 

Bitcoin is the 5 largest monetary base in the world. 

The monetary base is the total amount of a currency in circulation or held in reserves. By this measure, Bitcoin has become the 5th largest monetary base in the world. It is remarkable that it surpassed the oldest fiat currency in the world (The pound sterling).

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Final thoughts

Typically when there are such hot run ups in the price of an asset this volatile, there can be unforeseen air pockets. I do expect some choppy roads ahead. But there is no fundamental change to the bitcoin code, the positive sentiment is strong, the adoption is on the rise, and there is no reason to believe you are late to this adoption cycle. At Coinchange we are positioned to capture this once in a lifetime opportunity, message me if you want to work together!  

Ethereum update

ETH crossed 3k!

Last time we had 3k in April 2022, we were sitting on ticking time bombs such as Terra-luna, 3AC Capital, BlockFi, Celcius, Genesis and one of the most insane of all, the FTX bomb. We don’t have a crystal ball but this time we don’t see any such bombs yet. In the world of finance, ‘this time it is different’ is a very dangerous phrase. But it is slightly different; there is more institutional activity than retail. There are multiple ETH Spot ETFs in the line, waiting for the SEC to approve. 

Rising Tide of Liquid Restaking Tokens: A New Era for DeFi on Ethereum

EigenLayer launched a first-of-its-kind "restaking" system to Ethereum last June. The platform is building a solution to let blockchain apps and networks borrow Ethereum's security system, and it drew more than $1 billion in new deposits in a single 24-hour period this month. Now, the total amount is over $7 billion, meaning the platform has singlehandedly amassed more than 1.5% of all ether (ETH) tokens in circulation, according to DefiLllama. 

There are platforms like Puffer Finance that are offering restaking on behalf of users. Almost like Lido Finance is for Staking. This seems to be the new primitive in DeFi and certainly one that we at Coinchange are keeping our eye on. 

Starknet Airdrop Update

The Starknet Airdrop encountered several issues that led to dissatisfaction among some users. Firstly, after the STRK token was listed on major centralized exchanges like Binance and KuCoin, its price experienced a significant drop. The token's price fell by more than 40% from its peak within just 24 hours of listing, leading to concerns about its long-term performance. This volatility was partly attributed to the unlocking of 728 million STRK tokens (7.3% of the total supply of 10B) for the airdrop, which likely contributed to the price drop as users began claiming and potentially selling their airdropped tokens. The network also saw a notable decrease in active users from around 225,000 to 84,260 on the day of token distribution. STRK tokens were airdropped to around 1.3 M addresses making it one of the largest airdrops. 

Starknet's decision to reward developers for their GitHub activity, regardless of whether their contributions were inside or outside the crypto industry, led to some unexpected outcomes. This approach resulted in at least one developer receiving an allocation of 1,800 STRK tokens for simply fixing a typo in a repository. Such incidents have stirred discussions about the criteria used for token distribution and whether minor contributions should warrant significant rewards.

Furthermore, there was an issue with developers who had abandoned their GitHub usernames. Starknet acknowledged this oversight and reserved 1 million STRK tokens for a group of approximately 1,900 developers affected by this issue. 

“When you go and you try to distribute to 1.3 million addresses, it’s gonna be challenging and we are a very capable team technologically, and we have the best interests in getting it right,” StarkWare co-founder Eli Ben-Sasson told Blockworks.

ETH Spot ETF

BTC ETF approval raised everyone’s hopes that SEC would also approve an ETH Spot ETF. However the bloombery analysts are lowering their probability of approval as days pass by. There are concerns around the price discrepancy between the spot price and the futures price in the ETH futures market, which the SEC could use against approval. Although the probability of approval is non-zero, there is a high chance that the decision gets delayed. 

Like the spot BTC ETFs that began trading to huge success in January, the new products would buy ETH and sell shares via conventional brokerages, allowing a wide range of investors access to Ethereum, from massive hedge funds to individual IRA holders.

The SEC is obligated to make a decision on some of those applications by May 23. 

According to Bernstein analysts (who believe there’s a “near-certain probability” of approval in the next 12 months), ETH’s flexibility could make it a hit with Wall Street traders: “Ethereum with its staking yield dynamics, environmentally friendly design, and institutional utility to build new financial markets, is well positioned for mainstream institutional adoption.”

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DeFi Updates

Key DeFi Stats for February:

In February, the TVL increased significantly in dollar terms from around $59.3B to $87.6B for the whole DeFi market. DEX 30day volumes have gone up to $130 B in dollar terms after quadrupling from September at $35.2B. 

Here are the top 5 DeFi projects based on Total Value Locked (TVL):

Source: Token Terminal. TVL of top protocols

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A look at the top DeFi protocols based on the fees generated

And finally let’s look at the top 5 DeFi/NFT protocols/ecosystems with the most fees generated over 30 days, which generally translates to the most active protocols. In some cases, the protocols take a % of the fee as revenues (eg. Lido Finance) in other cases its distributed almost entirely to the Liquidity Providers Stakeholders (eg. Uniswap Liquidity Providers) hence their revenue varies based on such parameters. 

Here are the top 5 protocols for the month of February in terms of Fees generated:

Image by Coinchange, data sourced from Token Terminal

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1. Lido Finance is at the top of the list, generating the highest fees of $101 million. 

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2. Uniswap is second with fees amounting to $99.93 million. 

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3. MakerDAO ranks third with $30.25 million in fees.

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4. Aave is in fourth place, generating $29.7 million in fees.

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5. GMX is fifth, with fees of $14.52 million.

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Macro View

The State Of The US Economy

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The trajectory of the United States' national debt has been a matter of growing concern, with projections now indicating that the total debt could escalate to an alarming $50 trillion by the year 2034. This forecast comes in the wake of a significant increase in the debt level, which has surged by more than $2.8 trillion over the past year alone. As it stands, the United States is on a trajectory to reach a total debt of $35 trillion by June.

This dramatic increase can be attributed to a variety of factors, including expansive fiscal policies, emergency spending measures in response to crises, and a structural imbalance between revenue and expenditures. The implications of such a high debt level are multifaceted, affecting everything from national interest rates and inflation to the country's ability to invest in future growth and maintain its social safety nets.

To provide a clearer understanding of this trend, let's visualize the growth of the U.S. national debt over time with a chart.

The chart above illustrates the projected growth of the U.S. total debt from 2020 to 2034. As depicted, there's a clear upward trend in the debt level, with a notable increase from $27 trillion in 2020 to an estimated $35 trillion by mid-2024. This trajectory is expected to continue, reaching $50 trillion by 2034 if current trends persist.

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Regulations Update

Pantera Capital’s Regulatory Insights #001

Pantera Capital started a new series of interviews dedicated to Regulations in the blockchain industry: Regulatory Insights #001 :: Developments in Blockchain. Here are the key takeaways: 

There is a notable race among global jurisdictions such as Hong Kong, the UAE, Singapore, and the U.K. to establish themselves as digital innovation hubs. These regions are investing significantly to attract talent, in contrast to the United States, where the regulatory environment is perceived as less welcoming, potentially driving talent and innovation offshore. Scott Bauguess, VP of Global Policy at Coinbase, highlighted the importance of the U.S. adapting to become more innovation-friendly to prevent the permanent migration of human capital to these emerging centers. Meanwhile, regulatory agencies like the SEC and the CFTC are currently limited in their regulatory tools, often resorting to enforcement actions as a means to define boundaries within the blockchain industry. Kristin Smith, CEO of Blockchain Association, suggested that a more structured legislative framework is necessary to provide clarity and support for the sector. Neel Maitra, Partner at Wilson Sonsini, anticipated significant developments in the regulatory landscape for decentralized finance (DeFi), with the European Union being a potential leader in establishing a comprehensive regulatory framework.

U.K. Advances on Crypto Regulation: A Focus on Stablecoins and Staking

The U.K. government is making strides towards establishing clear regulations within the cryptocurrency sector, particularly focusing on stablecoins and staking activities. Economic Secretary to the Treasury, Bim Afolami, expressed the government's determination to finalize regulations around these areas within the next six months during an event by Coinbase. Notably, efforts are underway to categorize staking in a manner that prevents it from being seen as a collective investment scheme, according to Tom Duff Gordon, Coinbase’s vice president for international policy. Despite the urgency in these specific areas, Afolami remained cautious about setting a definitive timeline for broader crypto regulations, citing the vast scope of ongoing projects.

LEJILEX’s Legal Challenge Against the SEC

LEJILEX, alongside the Crypto Freedom Alliance of Texas, has taken legal action against the Securities and Exchange Commission (SEC) to challenge the regulatory body's authority over digital asset transactions. Filed late February, this lawsuit marks the first pre-enforcement legal action by a participant in the cryptocurrency industry against the SEC, potentially setting a significant precedent. The plaintiffs are seeking a judicial declaration that transactions on the Legit.Exchange platform do not constitute securities sales, thereby exempting LEJILEX from the requirements to register as an exchange, broker, or clearinghouse. This legal challenge highlights the ongoing debate over the classification of digital assets and seeks to curb what the plaintiffs describe as the SEC’s “ad hoc enforcement actions” that pose a threat to the digital asset industry. The SEC has been given 60 days to respond, and the outcome of this case could have far-reaching implications for regulatory practices in the digital asset space.

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Institutional Update

Michael Sailor being Michael Saylor buys additional 3,000 BTC

In February, MicroStrategy, a leading software firm and the largest corporate owner of Bitcoin, expanded its balance sheet by acquiring an additional 3,000 BTC, valued at approximately $155 million. This acquisition brings the company's total Bitcoin holdings to 193,000 BTC, which has an estimated worth of around $10 billion, including $3.8 billion in unrealized profits.

The Institutions are coming for BTC

At a KBW FinTech panel held in February, Jason Urban, the Global Head of Trading at Galaxy, provided insightful commentary on the growing institutional interest in cryptocurrency. Given Galaxy's involvement in managing the sale of crypto assets for the FTX estate, Urban is in a prime position to observe and report on this trend accurately. He noted a surge in engagement from significant institutional players who are entering the cryptocurrency market aggressively, taking substantial positions rather than making tentative, minor investments. Urban highlighted that many of these institutions are newcomers to the crypto space, indicating a broadening of the market's appeal. A notable example of this increasing interest was an urgent request Urban's trading desk received from an investor, demanding an immediate purchase of $50 million worth of Bitcoin in a single transaction

Mr. 100 Bitcoins: The secret bitcoin whale

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There's buzz around an entity now dubbed "Mr. 100," known for consistently acquiring Bitcoin in increments of 100 BTC, amounting to roughly $5 million per transaction, which also seems to be separate from ETF activities. This entity added to their holdings with another purchase of 14 blocks on February 29th, and their activities can be tracked through their public Bitcoin address. Observers are wondering if this could be the action of a Sovereign Wealth Fund (SWF) or possibly one of the billionaires who recently liquidated billions in stock, such as Jeff Bezos—though this remains speculative. This significant transaction appears to be unaffiliated with any ETF (Exchange Traded Fund) wallet, further fueling curiosity about the buyer's identity.

Crypto.com and BTG Pactual Team Up to Boost Crypto Banking in Latin America

Crypto.com has entered into a partnership with BTG Pactual, Latin America's largest investment banking institution, to advance crypto banking services in the region. This collaboration includes the listing of BTG Pactual’s stablecoin, BTG Dol, which is pegged 1:1 to the US Dollar, on Crypto.com. The partnership aims to promote the use of BTG Dol alongside major cryptocurrencies like Bitcoin and Ether, thereby facilitating the integration of crypto technology into traditional financial markets and enhancing the digital economy in Latin America. For more details, you can read the full article here.

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Capital Raises in February

Source: ICO Analytics

Here are the projects that raised money in February:

• Riot - Raised $559M in February 2024. It's a part of the Bitcoin Ecosystem and related to Web3.
• Beacon Accelerator - Raised $150M in February 2024. It's categorized as an Accelerator and Data Service.
• EigenLayer - Raised $100M in February 2024. It falls under the categories of DeFi (Decentralized Finance) and Ethereum Ecosystem. 
• Bakkt - Raised $50M in February 2024. It is associated with Data Service and Trading.
• Karak - Conducted a Series A round in February 2024, raised $48M, and has a valuation of $1B. Its categories include Infrastructure, L2 (Layer 2), and Security.

The total amount raised by these five projects is $907 million. 

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